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Before Your Next Home Loan, Get Pre-Qualified and Pre-Approved
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| Before Your Next Home Loan, Get Pre-Qualified and Pre-Approved |
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| Updated |
Jun 10, 2004 21:48:49 |
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Description:
Although many people outside of the mortgage industry—and some within it—use the two terms interchangeably, “pre-qualification” and “pre-approval” are actually two different, although related, processes. Each has its own benefits, and using them both over the course of a home search can give you many advantages as a buyer.
Make Pre-Qualification Your First Step
Going through pre-qualification for a loan can give you valuable information with which to begin preparing for a new mortgage.
Pre-qualification is an informal process, and can often take place over the phone or at a web site in just a few minutes. In it, a lender will ask you to provide information about your income, debt, and other financial matters. Based on the information you provide, the lender will give you an estimate of the dollar amount the company could lend you, and at what interest rates, if the information you have provided is accurate.
Because pre-qualification does not involve a credit check or the production of documents to support your financial history, the lender’s estimate is only that—it does not guarantee you the loan in any way. But the fact that it involves no credit check also means that pre-qualifying should not add an inquiry (a notation that someone has checked your credit) to your credit report.
Pre-qualification also gives you an opportunity to discuss your credit profile with a lender and act on any suggestions he or she may have for improving it before anyone runs a credit check. Of course, it is also important that you check your own credit report for accuracy before applying for a loan. One of the easiest ways to do this is to order either a CreditMatters Instant Online Credit Report or a CreditMatters triple merged 3-Agency Credit Report.
Seek Pre-Approval When You’re Ready to Shop Seriously
After you’ve shopped around and used the information you gained by pre-qualifying for loans at several lenders to choose the best deal and get your finances in order, apply for pre-approval with the lender of your choice.
Pre-approval is a more in-depth process than pre-qualification, and should result in a written document from the lender conditionally guaranteeing you a loan for a specified amount and specifying a maximum rate of interest.
Normal conditions might include requiring an appraisal on the home to verify it is not overpriced. A clause allowing the lender to decline to loan if your financial situation changes substantially between the time of your pre-approval and closing is also common. But pre-approval should not carry a lot of strings. If the lender requires a second review of your credit and finances, seek pre-approval elsewhere.
To get that conditional guarantee, you will for all intents and purposes apply for a loan. The lender will run a credit check on you, and also ask for other documents to prove your financial history and stability. These could include things like your past three bank statements, last few pay stubs, and perhaps copies of your income tax returns.
This may sound like a hassle, especially if you haven’t found a home to purchase yet, but going to the trouble of obtaining pre-approval can help you in several ways. For one thing, it may allow you to lock in a loan rate at current interest levels.
More importantly, it lets both you and home sellers know exactly how much you can afford. With that information in hand, you can shop wisely, and a seller can consider your offer more seriously than she or he would an offer from someone without a guaranteed loan.
Because your loan is virtually assured, you have the power of a cash buyer. A seller may be willing to take a slightly lower price, confident that you will be able to close the deal quickly, or may find your offer more appealing than other bids that don’t carry that guarantee.
Most lenders do charge a fee for pre-approval, but this should not be more than $50—and can be a lot less. And the benefits you gain as a homebuyer are well worth the cost and time. By using pre-qualification to obtain information, and then seeking pre-approval to obtain credibility as a serious buyer who is prepared to deal you can substantially smooth the way for your next home purchase.
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